Jefferies Bears in Retreat After Firm Boosts European Disclosure: Options
Concern about Jefferies Group Inc. (JEF) eased in the options market after the investment bank boosted disclosure of its European holdings and cut bets in the region.
The most-traded contracts on Jefferies, December $6 puts, fell 21 percent on Nov. 4 and dropped another 33 percent as of 4 p.m. New York time today. Options priced 10 percent below the stock cost 12.86 points more than contracts 10 percent above on Nov. 3, showing record pessimism, implied volatility data compiled by Bloomberg show. The relationship known as skew dropped to 12.25 today.
The shares fell 18 percent to $12.07 last week after losses on European government bonds drove MF Global Holdings Ltd. into bankruptcy, spurring speculation other securities firms will be hobbled by the crisis. Jefferies, based in New York, responded by providing details about its European holdings, and its biggest shareholder, Leucadia National Corp. (LUK), bought more stock.
“Jefferies doesn’t seem to be an excessively aggressive company in terms of their culture,” Oliver Pursche, co-manager of the GMG Defensive Beta Fund and president of Suffern, New York-based Gary Goldberg Financial Services, said in a Nov. 4 interview. The firm manages about $500 million. “I would be surprised if they took the levels and concentration of risk that seems to have impacted MF Global.”
Jefferies advanced 1.4 percent to $12.24 today after cutting gross holdings in sovereign securities of Portugal, Italy, Ireland, Greece and Spain by almost 50 percent since the end of last week. The company lowered both long and short trading positions by about $1.1 billion each.
The VIX, as the Chicago Board Options Exchange Volatility Index is known, jumped 23 percent last week to 30.16 as Greece’s reluctance to accept another bailout and a disagreement over boosting the International Monetary Fund’s resources threatened Europe’s efforts to halt its debt crisis. The volatility gauge fell 1 percent to 29.85.
The VStoxx Index (V2X), which measures the price of options on the Euro Stoxx 50 Index, gained 33 percent to 41.49 last week and rose 1.8 percent to 42.22 today.
Jefferies, founded in 1962 to help institutions trade large blocks of shares, issued five statements last week describing its investments in European sovereign debt. After a statement on its Portugal, Italy, Ireland, Greece and Spain holdings on Nov. 4, the shares erased a 7.4 percent loss, rising 0.5 percent. Following the close of markets that day, Jefferies listed all securities from those countries that it owns.
MF Global, which was run until Nov. 4 by former New Jersey governor and Goldman Sachs Group Inc. co-Chairman Jon Corzine, filed for Chapter 11 bankruptcy on Oct. 31 after a $6.3 billion bet on the bonds of some of Europe’s most indebted nations prompted regulator concerns and a credit rating downgrade.
Jefferies had about $2.41 billion in so-called long bets on the sovereign risk of the five nations and $2.32 billion in short positions, according to the Nov. 4 statement. Its shares retreated as much as 20 percent on Nov. 3 after Egan-Jones Ratings Co. cut the company’s credit rating to BBB-, citing a “changed environment” following MF Global’s collapse.
“It’s a bear raid on the company,” Anton Schutz, who manages $150 million as president of Mendon Capital Advisors Corp., said in a Nov. 4 phone interview. The Rochester, New York-based asset manager focuses on financial stocks and does business with Jefferies. “I do not believe that this company should be in danger,” he said. “The problem is that when everybody begins to believe Jefferies is in trouble, then it becomes a self-fulfilling prophecy.”
Options trading shows concern about Jefferies eased on Nov. 4, a day after Leucadia said it bought 1 million more shares for $11.84 each. Leucadia purchased another 500,000 shares on Nov. 4 at $11.35 apiece.
Jefferies December $6 puts changed hands 40,640 times on Nov. 4 as they dropped to 30 cents. The four most-traded puts -- all of which expire in December and have strike prices at $5, $6, $10 and $11 -- declined in value as Jefferies shares climbed 0.5 percent, avoiding losses in the stock market that drove the Standard & Poor’s 500 Index down 0.6 percent.
Options losses followed an increase in bearish bets against the company. The five contracts with the biggest increase in ownership during the seven days ended Nov. 4 were puts, according to data compiled by Bloomberg. November $9 puts added 9,773 options, while open interest for December $5 puts grew to 5,224 from zero. Jefferies last closed below $5 in 2000.
“These are fragile times in the financial market and we decided the only way to conclusively dispel rumors, misinformation and misplaced concerns is with unprecedented transparency about internal information that is rarely, if ever, publicly disclosed,” Richard Handler, chairman and chief executive officer, said in a Business Wire statement on Nov. 4.
Richard Khaleel, a Jefferies spokesman, declined to comment on the options trading.
Jefferies’s implied volatility, the key gauge of options prices, for contracts expiring in 30 days jumped to 122.36 on Nov. 3, its highest level since November 2008, or two months after Lehman Brothers Holdings Inc.’s collapse intensified the global financial crisis. The 101 percent increase in the measure from Oct. 31 to Nov. 3 was the most among Standard & Poor’s MidCap Financials Index companies, Bloomberg data show.
“People think there’s a possibility this company goes away, although that risk seems to have been diminished with the latest press release,” Ophir Gottlieb, managing director of client services at San Francisco-based Livevol Inc., a provider of options-market analytics, said in a phone interview Nov. 4. “They’ve come out and said all the right things -- but if they change one thing now, if they say ‘Oh, actually we have $1 more of exposure than we thought’ -- people might make it collapse.”